Analysis & Opinion

NEW YORK (Reuters) - BlackRock Inc's (BLK.N) first-quarter net income rose 10.5 percent as investors, growing more confident in the economy, gravitated toward stock funds, the world's largest money manager said on Tuesday.

For the first time since the financial crisis struck in 2008, equity funds emerged as the dominant investment vehicle, giving the New York-based company a boost because they are more profitable than bond funds.

During the quarter, BlackRock customers added $33.7 billion to equity offerings, representing the lion's share of $39.4 billion of new flows into long-term funds.

Low yields on fixed-income securities and fears that bond investments will lose more value when interest rates eventually rise contributed to the shift, BlackRock Chief Executive Laurence Fink said. He also said that investors globally are getting more confident about U.S. stocks.

"One thing that is evident is that economists have miscalculated the robustness of the U.S. economy," he said in an interview.

Even though investors have been pouring money into exchange-traded stock funds and other equity products, Fink hesitated to call the trend "a great rotation" out of less risky bonds.

"As investors move back to equities, they're cautious," said Fink, who built his career as a bond salesman, in a conference call with analysts. They are trying to balance their need for higher returns at the same time that they are seeking low-risk investments, he said.

As a consequence, BlackRock is focusing on adding balanced strategy products that will appeal to an aging population facing low returns from rock-bottom interest rates.

Profit margin rose to 40 percent on an adjusted basis from 38.6 percent adjusted one year earlier. BlackRock attributed the jump to strong expense control as well as the higher fees that equity products generate.

Shares of BlackRock fell in morning trading but rebounded later in the day. They were up 0.53 percent, or $1.34, at $255.20 in mid-afternoon trading on the New York Stock Exchange. The shares have gained 23.5 percent so far this year, surpassing a 10.2 percent gain for the Standard & Poor's 500 Index .SPX.

MORE CONFIDENCE IN U.S. ECONOMY

Along with the tilt toward equities, investors withdrew more money than they added to BlackRock's bond funds, pulling out a net $2.6 billion. They withdrew $2.2 billion from currency funds, while adding $9 billion to multi-asset portfolios and $1.5 billion to core alternative funds.

Retail mutual fund assets fell 1 percent from a year earlier to $421.1 billion, representing 11 percent of assets. BlackRock replaced four of its stock fund managers recently, and Fink said it is "committed to improving performance" in its actively managed fund sector.

BlackRock is making a particularly big push into exchange-traded funds, an area it entered in 2009 when it bought iShares from Barclays. It is the biggest U.S. provider of ETFs, which made up 22 percent of its assets under management at March 31, and is stepping up sales efforts after losing market share to new competitors that were competing on price.

In March, BlackRock expanded a three-year partnership with Fidelity Investments, which now promotes 65 iShares ETFs to its clients without charging a commission. Previously, BlackRock paid Fidelity to list just 30 such funds.

Long-term net inflows into iShares have shifted from emerging market products in January and February to broader U.S. market indexes in March and April, particularly large-capitalization ETFs.

"If you look at the overall trends, there has been huge investing in U.S. equities as the world started believing in the U.S. economic story," Fink said in the conference call.

He also promoted the firm's international ETFs, saying investors need to replicate broad returns in global markets that are increasingly integrated.

For years, they ignored Japan, but as the country emerges from its long period of deflation, money is pouring into ETFs focused on Japanese securities, he said. The same is true for Mexico-focused funds that reflect that country's "great economic story."

All told, inflows into stock ETFs accounted for $20.4 billion out of $25.6 billion of all new flows into iShares last quarter, while revenue in the funds climbed 22 percent to $687 million.

BlackRock also is creating more hedge fund and other "alternative" investment products to help customers beat average market returns, Fink said. BlackRock oversees more than $1.5 billion of assets in such funds.

SERIOUS MONEY

The firm ended the quarter with record total assets under management of $3.94 trillion, including new money and market gains.

BlackRock's net income rose to $632 million, or $3.62 a share, from $572 million, or $3.14 a share, a year earlier.

Excluding costs to launch a closed-end fund, a new compensation plan and other one-time items, earnings were $3.65 a share. On that basis, they beat analysts' average forecast of $3.58 a share, according to Thomson Reuters I/B/E/S.

In March, BlackRock told its staff it would reduce headcount by nearly 300 employees, or about 3 percent, according to an internal memo obtained by Reuters. The cut is part of a reorganization that began last year.

In another major cost shift, BlackRock is de-emphasizing its strategy of making large acquisitions and focusing on the more efficient alternative of expanding existing businesses through improved asset management and marketing.

Compensation expenses, lifted by severance costs during the quarter, totaled a higher-than-usual 36 percent of total revenue, Chief Financial Officer Ann Marie Petach said in the conference call. Executives, who are selectively adding managers and salespeople, said they expect to end 2013 with more employees than they have today.